Draghi teases pos­si­ble QE in­tro­duc­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

Once again, the EURUSD en­coun­tered another volatile week. Com­ments from ECB Pres­i­dent Mario Draghi in­di­cat­ing any ex­ten­sion to its As­set Pur­chase Pro­gramme could in­clude gov­ern­ment bonds opened the doors for QE spec­u­la­tion, send­ing the Eu­rodol­lar to the lower 1.24s as a re­sult. The Eu­rodol­lar then re­cov­ered its losses on Tues­day and ral­lied above 1.25 fol­low­ing the lat­est Ger­man ZEW Survey sur­pass­ing forecasts. Cau­tion was shown among in­vestors ahead of the FOMC Min­utes re­lease on Wed­nes­day, which re­sulted in the Eu­rodol­lar ap­pre­ci­at­ing as high as 1.2598 through risk ap­petite. The rally came to a halt there though, with the weak­est PMIs in 16 months on Thurs­day reignit­ing fears over stag­nant eco­nomic growth. Com­ments again from Mario Draghi on Fri­day hint­ing that the ECB is ready to act again led to the EURUSD con­clud­ing the week around 1.2390.

With the next ECB meet­ing less than two weeks away, spec­u­la­tion is height­en­ing that the in­tro­duc­tion of fur­ther stim­u­lus will likely en­cour­age in­vestors to price in fur­ther ac­tion and, sub­se­quently, send the Euro lower. Although the pres­sure is on the ECB to act once again, the EU eco­nomic prob­lems go beyond ECB pol­icy and could also be linked to re­duced global de­mand for EU prod­ucts. Op­ti­mism that the weaker ex­change rate would im­prove eco­nomic for­tunes was swept aside by Thurs­day’s weak PMIs, but I re­main up­beat it can help data. The im­proved Ger­man ZEW Survey sug­gests Europe’s largest econ­omy might be en­ter­ing the fi­nal stretch of the year with some mo­men­tum and if the weaker Euro helps Ger­man ex­ports, it would rep­re­sent a chance for the Eu­rodol­lar to re­cover losses.

From a tech­ni­cal stand­point, the Eu­rodol­lar is con­tin­u­ing to trade in the same bear­ish di­rec­tion it has done for months. If the pair chooses to re­cover some of last week’s losses, re­sis­tance can be found at 1.2418, 1.2426 and 1.2445. If the ECB con­tinue to tease the prospect of more stim­u­lus in less than two weeks, EURUSD support can be found at 1.2374 and 1.2358.

After a roller­coaster cou­ple of weeks, the twists and turns on the GBPUSD jour­ney fi­nally showed some signs of slow­ing down last week. Say­ing that, the GBPUSD dropped to another yearly low on Wed­nes­day at 1.5589 as in­vestors priced in a dovish Bank of Eng­land (BoE) Min­utes re­lease. On Thurs­day, the pair re­ceived a boost when UK Re­tail Sales in­creased by an an­nu­alised 4.6% and this re­sulted in the GBPUSD climb­ing as high as 1.5721. Although ex­pec­ta­tions for an up­com­ing in­ter­est rate rise have been pushed back for up to a year and there are signs of UK eco­nomic mo­men­tum slow­ing as the BoE pre­vi­ously sug­gested, the ro­bust re­tail sales per­for­mance is a re­minder to in­vestors that the UK fun­da­men­tals re­main strong.

The prob­lem with the GBPUSD is that with op­ti­mism for an in­ter­est rate hike next Spring now ap­pear­ing to be noth­ing other than wish­ful think­ing, and with the UK gen­eral elec­tion cam­paigns for next May start­ing to get at­ten­tion, in­vestor at­trac­tion to­wards the GBPUSD is limited. In or­der for the pair to con­tinue its de­cline, it would ei­ther re­quire fur­ther signs of UK eco­nomic mo­men­tum slow­ing down or in­creased de­mand for the USD. Although both shouldn’t be ruled out, some sort of con­sol­i­da­tion for the pair after such a pe­riod of heavy sell­ing seems more likely. With in­vestor at­trac­tion to the GBP be­ing low, USD weak­ness would be re­quired for the pair to move to the up­side.

In ref­er­ence to the tech­ni­cals, the GBPUSD is con­tin­u­ing to trade in the same fall­ing wedge pat­tern it has found it­self inside re­cently. If profit-tak­ing on the USD en­cour­aged the pair to move to the up­side, re­sis­tance can be found lo­cated at 1.5712 and 1.5736. Down­side move­ment can find support around 1.5626 and 1.5589.

Com­pared to pre­vi­ous weeks, vo­latil­ity in the Gold mar­kets was qui­eter than what we have no­ticed re­cently. Gold largely traded be­tween $1177 and $1205, with the lat­ter be­ing seen as re­sis­tance. The pre­cious metal with­stood pres­sure on Wed­nes­day when the lat­est FOMC Min­utes largely hinted that the first US in­ter­est rate rise would oc­cur be­tween the mid­dle and lat­ter 2015 – in­creas­ing de­mand for the USD. How­ever, the widely spo­ken about $1180 psy­cho­log­i­cal support level came to the res­cue once again, with Gold touch­ing $1177 be­fore con­clud­ing the week as high as $1207.

Although Gold has spent the majority of the lat­ter half of 2014 trad­ing strictly in ac­cor­dance with US eco­nomic news, it might be worth in­vestors keep­ing an eye out on eco­nomic news else­where. For ex­am­ple, the early Mon­day news has al­ready sug­gested that global business con­fi­dence is at a five-year low and with the Peo­ple’s Bank of China (PBoC), ECB and Bank of Ja­pan all eas­ing to stim­u­late their economies, fur­ther global eco­nomic con­cerns could push in­vestor at­trac­tion to­wards Gold. In re­gards to US eco­nomic data, at­ten­tion should be paid to­wards US GDP and Con­sumer Con­fi­dence, Durable Goods, and Ini­tial Job­less Claims. Fur­ther sig­nals of the US eco­nomic out­look con­tin­u­ing to im­prove this week would likely pres­sure met­als.

Gold has cur­rently found re­sis­tance around the $1205 area and would need to sur­pass this level if it were to make a move to­wards fu­ture re­sis­tance around $1215 and $1223. Support can be found at $1190, with crit­i­cal support be­ing lo­cated around the $1180 support level. If the value of Gold was to de­cline back to the $1150 area, a solid break be­low $1180 would be re­quired.

After slid­ing steeply through the charts re­cently, Brent Oil found some support around $77.50 last week. Spec­u­la­tion re­gard­ing ma­jor cen­tral banks eas­ing mon­e­tary pol­icy fur­ther to stim­u­late its econ­omy en­cour­aged Brent to ad­vance above $78 mov­ing as high as $81.58 fol­low­ing Fri­day’s rate cut from the Peo­ple’s Bank of China (PBoC). As to why mon­e­tary eas­ing would in­crease an up­turn in val­u­a­tion, the moves from the cen­tral banks are widely seen as de­ci­sions to rein­vig­o­rate the global econ­omy, which in turn should lead to in­creased de­mand for crude.

Look­ing ahead, in­vestors will be solely con­cen­trat­ing on the out­come of Thurs­day’s OPEC meet­ing be­fore de­ter­min­ing which di­rec­tion Brent will trade next. If a ma­jor oil pro­ducer in­di­cates that it would be will­ing to re­duce its pro­duc­tion, it would rep­re­sent an op­por­tu­nity for Brent to ei­ther con­tinue con­sol­i­dat­ing around $80, or progress fur­ther. Whether Brent crude could progress fur­ther would re­ally be de­pen­dent on who is will­ing to cut sup­ply, and for what du­ra­tion.

How­ever, if the out­come to the OPEC meet­ing in­di­cates no ma­jor pro­ducer is will­ing to cut sup­ply, it would pres­sure the oil mar­kets and likely lead to a re­turn be­low $80.

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